VIEWPOINTS: Applying IFRSs in the Oil and Gas Industry PRESENTATION OF TRANSPORTATION COSTS JULY 2016 Background Oil and Gas Industry Oil and gas commodities are often extracted in remote locations Task Force on IFRSs and require transportation. Some producers may sell their com- International Financial Reporting modity at the wellhead, processing facility, or pipeline inlet; Standards (IFRSs) create unique others may transport or engage a third-party intermediary challenges for junior oil and gas (i.e., a shipping company) to carry the commodity to the pur- companies. Financial reporting chaser (i.e., customer). in the sector is atypical due to signifjcant difgerences in char- acteristics between junior oil Transportation costs may be paid by the producer. In other and gas companies and other instances, transportation costs may be paid by the purchaser types of companies. The Cana- and, in some cases, subsequently refmected as an adjustment or dian Association of Petroleum ofgset to the price paid to the producer. This adjustment is often Producers (CAPP), the Explorers and Producers Association of referred to as a “notional location difgerence”, which is the difger- Canada (EPAC) and the Char- ence between the price at the delivery point (i.e., the point where tered Professional Accountants the commodity is transferred to the purchaser) and the market of Canada (CPA Canada) cre- where the product is priced (i.e., a designated market sales hub). ated the Oil and Gas Industry Task Force on IFRSs to share views on IFRS application issues For example, the market sales price for a barrel of crude oil of relevance to junior oil and is $50 at location X, a designated market sales hub. The pro- gas companies. The task force ducer produces this particular barrel of crude oil at location A (a views are provided in a series of location that is not a designated market sales hub). The cost of papers that are available through free download. These views are transporting oil between location A and X is $10. This document of particular interest to Chief will explore circumstances when the producer recognizes $50 of Financial Offjcers, Controllers revenue and a transportation expense of $10 within the statement and Auditors. of profjt or loss, and circumstances when the producer recognizes The views expressed in this $40 of revenue with no associated transportation expense. series are non-authoritative and have not been formally endorsed by CAPP, EPAC, CPA Canada or the organizations represented by the task force members. THE EXPLORERS AND PRODUCERS ASSOCIATION OF CANADA 1
Issue In what circumstances should transportation cost be netted from revenue or presented as a separate expense by a producer? Viewpoints Whether the producer recognizes $50 of revenue and $10 of transportation expense or whether the producer recognizes $40 of revenue without showing a transportation expense will depend on the specifjc facts and circumstances discussed below. Revenue is measured at the fair value of the consideration received or receivable. The loca- tion where a commodity is sold can impact its fair value. This is clarifjed by IFRS 13.26: If location is a characteristic of the asset (as might be the case, for example, for a com- modity), the price in the principal (or most advantageous) market shall be adjusted for the costs, if any, that would be incurred to transport the asset from its current location to that market. For oil and gas, location is generally a characteristic of the price of the asset. For example, oil delivered at a wellhead may have a lower price than oil delivered at a location with an active market (e.g., designated market sales hub). When considering the presentation of revenue and as a consequence the associated trans- portation costs (if any), an oil and gas entity analyzes where the signifjcant risks and rewards of ownership transfer to the purchaser under IAS 18 Revenue . In a straightforward sale, risks and rewards of ownership to a barrel of oil often transfer to a purchaser when title to the barrel of oil transfers. An oil and gas entity should also assess its revenue arrangements against specifjc criteria in order to determine whether it is acting as principal or agent. Example 21 in the Illustrative Examples accompanying IAS 18 includes guidance to help determine whether an entity is acting as a principal or as an agent. The list of features in Example 21 is not intended to be exhaustive. Accounting by Producer without Transportation Commitments When a producer has no transportation commitment because the transportation of the product is the responsibility of the purchaser, the producer generally does not present transportation expense for the associated sale. In certain instances, a purchaser may agree to pay for the product net of a transportation cost. This adjustment may refmect a notional transportation cost (see “Background” section above) or an actual transportation cost incurred by the purchaser to transport the product. Since the producer is not responsible for transportation (i.e., the producer is not the principal 2 Viewpoints: Applying IFRSs in the Oil and Gas Industry | Presentation of Transportation Costs July 2016
in the transportation arrangement), the producer presents revenue at the net amount received from the purchaser (i.e., refmecting the value of the product at the point of sale) and no transportation expense for the associated sale. 1 For example, the market sales price for a barrel of crude oil is $50 at location X, a desig- nated market sales hub. The producer produces this particular barrel of crude oil at location A (a location that is not a designated market sales hub). The purchaser agrees to acquire the noted barrel of crude oil from location A and pays the producer $40/barrel. The producer does not have a transportation commitment. In this case, assuming no other pricing consid- erations except location, the $10 difgerence between the market sales price and the agreed transaction price is associated with the location difgerence. Accordingly, in this example, the producer recognizes $40 of revenue with no associated transportation expense. Accounting by Producer with Transportation Commitments When a producer has a transportation commitment, the producer generally presents the associated transportation expense for the associated sale. A producer that has a transpor- tation commitment is generally the principal in the arrangement with the transportation company, unless it has been released on an absolute basis from this commitment (discussed further below). In practice, a transportation commitment may arise either directly with the transportation company or be the result of a fjrm commitment for transportation with the purchaser or a marketing agent. When the producer has a transportation commitment, generally there are two scenarios: 1. Title to the product has passed to the purchaser after transportation When title to the product has passed to the purchaser after transportation, the purchaser has enhanced the value of its product by transporting it to a sales location (e.g., a desig- nated market sales hub). For example, the market sales price for a barrel of crude oil is $50 at location X, a des- ignated market sales hub. The producer produces this particular barrel of crude oil at location A (a location that is not a designated market sales hub). The purchaser agrees to acquire the noted barrel of crude oil from location X and pays the producer $50/bar- rel. The producer has a transportation commitment to deliver the oil to location X; title to the oil passes to the purchaser after transportation. In this case, because the producer is a principal in the transportation arrangement, the transportation costs for the associ- ated sale is presented by the producer and not netted against revenue. Accordingly, in this example, the producer recognizes $50 of revenue and an associated transportation expense at its cost of transporting the oil to location X. 1 Under IAS 18.14, one of the criteria for recognizing revenue is that “the entity has transferred to the customer the signifjcant risks and rewards of ownership of the goods”. Example 21 in the Illustrative Examples accompanying IAS 18 includes guidance to help determine whether an entity is acting as a principal or as an agent. The list of features in Example 21 is not intended to be exhaustive. An entity is acting as a princi- pal when it has exposure to signifjcant risk and rewards associated with the sale of goods or rendering of services. A principal to the arrangement records revenue at the gross amount; an agent to the arrangement records revenue at the net amount. July 2016 Viewpoints: Applying IFRSs in the Oil and Gas Industry | Presentation of Transportation Costs 3
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